Software Growth Will Be Key For Blackberry Ltd (BBRY), According To Morgan Stanley (MS)

Morgan Stanley (NYSE:MS) believes that software growth will be key for BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) in its turnaround efforts. The brokerage pointed out that stock dropped over 40% from the high of $12.59 recorded in January. Its analyst, James Faucette, has not only maintained his Equal-weight rating but also retained the price objective of $7 on the company’s shares. The turnaround effort was initiated in November 2013 after the entry of John Chen as its CEO.

Should Demonstrate Meaningful Upside

The analyst, Faucette, said that BlackBerry Ltd (NASDAQ:BBRY) should demonstrate meaningful upside to the expectations of software revenue. He believes that it was necessary to maintain its operating expenses at current levels without compromising the balance sheet. Though Chen has been saying that its focus was on software, the Canadian firm has also been unveiling different models of smartphones. They don’t seem to be having any plans to exit the hardware business all-together.

The company is scheduled to release its financial numbers for the second quarter on September 25. For that period, the brokerage sees the company with revenue of $30 million from licensing while it estimates $155 million licensing revenue for the whole of the year. In the first quarter, the Canadian firm witnessed 150% growth in software revenue. The company has also indicated its readiness to monetize over 44,000 patents. Chen said that it was one of the tactics for turning around the company.

One-Time Events

Morgan Stanley (NYSE:MS) analyst said that it did not believe that there was a deep pool of big licensees. He also wanted the smartphone maker to demonstrate recurring revenue from its licensing deals. Until such time, the brokerage said it can treat such opportunities as one-time events only. Excluding the license revenue, software revenue was below expectations in the first quarter. Therefore, there is an element of doubt on the capability to generate licensing revenue regularly.

Faucette said that licensing revenue can be treated as an additional avenue to maintain its cash balance braving the investments made in software, as well as devices. The analyst also thinks that additional flexibility can be achieved by liquidating the long-term individual worth that the IP portfolio might have.

Execution Concern Remains

The brokerage was also concerned about BlackBerry Ltd (NASDAQ:BBRY)’s execution part in respect of software due to the tough environment of mobile security. He said that though the company might see growth in its BES12 subscribers, the gains might be compensated by pricing pressure due to bundles of enterprise software solutions.

Aside from that, Faucette said that the demand for BlackBerry Ltd (NASDAQ:BBRY)’s handsets was estimated to have been weak. He said that device sales expectations in the second quarter and the full year were not sufficient enough to sustain the profitability of the handset unit. He also expressed his doubts and the prospects of Android-based BlackBerry devices.

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.